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Collude to delude

A good friend of mine recently remarked that “success can hide many things”, which made me reflect on the way boards and non-executive directors can misjudge what really drove recent successes. In all walks of life, it is too easy to take success for granted or, even worse, take credit for success that is largely the result of external factors.

Examples flood to mind. Think of the banking chief executives whose apparent genius has been little more than being in place at a time when unprecedented cheap money was available to them. Less apparent – but equally relevant – examples are the retailers who failed to take the internet seriously until their customers suddenly were no longer their customers. The focus on profit, only to realise that running out of cash is the real headache, is even more common.

I can cite an international construction company proudly announcing the umpteenth year of increased profits, seemingly blissfully unaware that it is going to run out of the super-large contracts that were the source of those profits. The contracts were won by the founder, and no one else in the company has his contacts or vision on where to look next. It is no longer a big international construction company; it is now just riding the coat-tails of its successful past.

The need to understand what the drivers of success are and see which of those you can control is as important to businesses that are doing well as addressing any failings. In this fast-changing technological age, this carries the highest importance. The risk of someone else stealing your customers simply through better application of technology to a process or route to market is now an ever-present threat. The impact on a wide range of agent and broker businesses – outfits such as TradeMe or eBay – are well documented, but there are few businesses whose customer and supplier interfaces are not similarly vulnerable.

It has been ever thus, but it is the speed of change that more frequently catches companies unaware now. Customers tweeting, blogging or Facebook-sharing can undo the most carefully planned marketing and sales campaign virtually overnight. Companies that are not actively tuned in to this e-world can easily miss changes in mood and behaviour that have a significant effect on business, which can lead to resource allocations that may not be justified.

The risk assessment and mitigation processes at most bigger businesses are designed to provide early warning signs of where the so-called black swans might come from. But there are rather too many examples of sophisticated risk management systems not sensing the winds of change early enough. In many cases, this reflects an unspoken assumption that things will carry on as they are, in perpetuity. A more useful and down-to-earth approach is an engagement with the various business drivers, customers and suppliers.

This is not an easy thing to do. Does any chief executive want to concede that 10, 20 or 50 percent of their profit is a product of being in the right place at the right time, or that it might only last at current levels for as long as a particular set of external circumstances exist? Such arguments do not help an executive’s remuneration objectives and are easily misunderstood by investors and other external stakeholders. The fact there is a considerable risk of misinterpretation when the non-executive points out to them just how fragile a particular profit stream may be is not a good argument for not addressing the issue. It is another reason for addressing how such vulnerabilities are going to be managed.

The failure to address the questions of “how sustainable”, “until when” or “until what” is a form of corporate mendacity (another of my aforementioned friend’s phrases). It is a form of denial that results in the perpetrators individually, and as a board, kidding themselves as to what is happening.

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